£10,000’s a healthy amount to have tucked away. So if I managed to save up that much, I’d want to make sure I made it work as hard as possible for me. Yes, I could leave it in the bank and pick up a fairly attractive interest rate. But instead, I’d invest in the stock market and start making a second income.
I think over time, that’s the smarter thing to do. When rates fall, so will the amount of interest I receive. The market’s proven over time that investors willing to play the long game are rewarded.
To start making a second income, I’d buy stocks with meaty dividend yields. It’s a method I’ve been using since I started investing. If I had £10,000 stashed away, here’s what I’d do.
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Open an ISA
Before I even considered buying any shares, I’d open a Stocks and Shares ISA. Every year, UK investors have up to £20,000 to invest in their ISA. This comes with a handful of benefits. The main one is that any capital gains made or dividends received aren’t taxed.
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Buying stocks
So I’ve set up my ISA. Next, I need to decide what sort of businesses I want to invest in. I tend to stick with the FTSE 100. Many of its constituents are well-known companies with massive customer bases operating in large industries. They also tend to offer handsome yields.
Take M&G (LSE: MNG) as an example. It’s a stock I’d buy today if I had the cash. In all fairness, it hasn’t posted the best performance in 2024. During that time, it’s down 6.9%. But I still like the look of its shares.
Its weak outing this year can be pinned down to ongoing economic uncertainty. Inflation’s a lingering threat. High interest rates and the risk of a delay in future cuts are also a detriment to its operations. Due to these factors, investors can pull their money out of funds. We’ve seen this play out over the last couple of years and it’s something to watch moving forward.
But with its 9.5% yield, I’m a fan of M&G. That’s one of the highest payouts on the index. What’s more, since listing in 2019, the business has raised its dividend every year. Dividends are never guaranteed. However, management has said it aims to keep this trend up moving forward.
M&G also operates in a massive industry with strong growth potential. It has good brand recognition and a large customer base (over 5m) alongside 900 institutional customers.
Finally, its shares look like decent value, trading on just 8.5 times forward earnings. That’s below the FTSE 100 average of 11.
Generating a second income
Taking M&G’s 9.5% yield and applying it to my £10,000 would see me earn £950 a year as a second income. That’s not bad. But I’m aiming for more.
That’s why I’d reinvest every dividend I received into buying more shares. By doing so, I’d benefit from ‘dividend compounding’.
By doing that, after 30 years my £10,000 could be generating £15,434 a year as a second income. My initial lump sum would have grown from £10,000 to £170,949. That would go a long way in helping me during retirement.
